Alternative investment platforms
The traditional investment portfolio of 60% stocks and 40% bonds may be a thing of the past. The disappointing results of public actions, the increase in inflation and the rises in interest rates that are putting pressure on the economy are giving rise to alternative investment strategies. These include a wide range of assets, from private equity to real estate to art.
Alternative investments offer higher return opportunities compared to investing exclusively in stocks and bonds. As such, assets under management (AUM) in alternatives are expected to increase from $13 million in 2021 to $23 million in 2026, according to Preqin's forecasts.
Alternative investing has historically been the preserve of institutions, with alternative asset managers targeting those who could write the biggest checks. Pension funds, endowments and large institutions can afford the minimum investment requirements of more than 20 million dollars.
But this is starting to change as tech companies are targeting the retail market, opening up opportunities for wealth managers, advisors and even consumers.
WHAT IS ALTERNATIVE INVESTMENT?
Alternative investing is any investment opportunity in assets beyond traditional stocks, bonds, and cash. These include private equity, private credit, venture capital, hedge funds, real estate, land, commodities, art, wine, collectibles, and cryptocurrency.
Alternatives are often illiquid, meaning they are more difficult to buy, sell, or convert into cash. They are also considered riskier than traditional investments. It's harder to get out of an illiquid investment when its value depreciates.
Private market alternatives, such as private equity, venture capital, hedge funds, and some real estate, are considered especially risky. Private companies have a high rate of fracaso and the housing market has historically been difficult to predict. Due to the high levels of risk, the SEC only allows institutional and accredited investors to invest in the private markets.
That being said, private markets account for the lion's share of alternative investing dollars by far – the higher the risk, the higher the reward.
Endowments (for example, universities) and very high net worth individuals allocated close to half of their investments to private alternative markets by the end of 2020, according to a KKR study. The average retail investor, by contrast, only put 2% into private markets, according to McKinsey. But that gap is slowly starting to close. McKinsey projects that between 2020 and 2025, the growth of alternative investments by retail investors could be between $500.000 and $1,3 million, representing a share of 3% to 5%.
